Boot is anything of value the taxpayer receives in a §1031 that isn't like-kind real estate — cash leftover after closing, debt relief on the relinquished property, or non-real-estate items. Boot is taxable to the extent of realized gain and recaptures depreciation first under the 'recapture first' allocation rule. The two main categories are cash boot (proceeds you pocket) and mortgage boot (debt reduction on the trade-down side). Both can be eliminated with proper structuring.
"Boot" is the §1031 term for any consideration you receive in an exchange that isn't like-kind real estate. The word originated in old American horse-trading: "I'll trade my horse for yours and throw in $50 to boot." The IRS adopted the language for the residual non-like-kind value in any like-kind exchange, and the rule has been a fixture of §1031 since the original 1921 statute.
Cash Boot (the Obvious Kind)
Cash boot is the easy version. If you sell a property for $700K and buy a replacement for $600K, the $100K difference is cash boot — it lands in the QI escrow and at day 181 (after the exchange period closes) is released to you. That $100K is taxable.
The taxation works like this:
- Boot is recognized to the extent of realized gain. If you have $500K of realized gain and receive $100K of boot, you recognize $100K of gain on this exchange. The remaining $400K of gain is deferred.
- The recognized gain is allocated first to depreciation recapture (taxed at 25%) and then to capital gain (taxed at 15-20%).
- If you have less realized gain than boot received (uncommon), the gain caps at the realized amount.
Sources of inadvertent cash boot at closing:
- Earnest money deposits returned to the seller (if structured wrong).
- Closing-cost credits paid to the buyer.
- Prorations and concessions that move cash to the seller side.
- Repairs paid out of exchange escrow that shouldn't have been.
The cure is generally to identify the exposure before closing and either route the cash through the QI properly (avoiding constructive receipt) or pay it from outside funds.
Mortgage Boot (the Hidden Trap)
Mortgage boot is the version that surprises investors. The rule is: if your replacement property has less debt than your relinquished property, the difference is treated as boot received.
Example: Sell a property with a $400K mortgage outstanding, buy a replacement with a $250K mortgage. The $150K reduction in debt is mortgage boot, taxable in the same way as cash boot.
The reasoning is that debt relief is economically equivalent to receiving cash — the IRS treats your reduction in liabilities as if you had received the difference in cash and used it to pay off your old loan. From a tax perspective, the result is the same.
Mortgage boot is the most common surprise on 1031 exchanges because investors trade down in debt for legitimate reasons (lower interest rate, retirement planning, smaller property). Without an offset (see below), the resulting boot can be substantial.
Boot exposure on a trade-down?
We model the cash and mortgage boot in the exchange agreement before closing. Same-day exchange opening with $799 flat fee and $5M+$10M coverage.
Call (725) 224-5008Offsetting Mortgage Boot With New Cash
The cure for mortgage boot is to add fresh cash equal to the debt reduction. Adding cash is not boot received — only cash extracted is. So if you trade down in debt by $150K, adding $150K of fresh cash to the replacement closing offsets the boot exactly.
Example with offset:
- Relinquished: $700K sale price, $400K mortgage paid off, $300K equity to QI.
- Replacement: $700K purchase, $250K mortgage, $300K from QI escrow + $150K fresh cash = $450K equity.
- Mortgage boot: $400K - $250K = $150K (boot received from debt reduction).
- Cash added: $150K (offset against mortgage boot).
- Net boot: $0. Full deferral.
The fresh cash can come from any source — savings, HELOC on a different property, a margin loan, family contribution. The IRS does not care about the source; only that fresh cash is added at closing rather than extracted.
The "equal or up" rule encapsulates this: to fully defer, the replacement must equal or exceed the relinquished in both total value and equity. Trade-downs in either dimension produce boot.
Personal Property Boot (Post-TCJA)
Before the Tax Cuts and Jobs Act of 2017, personal property could be exchanged under §1031 alongside the real estate. The TCJA narrowing of §1031 to real-property-only ended that. Now, any personal property received in connection with a real-estate exchange is boot.
Common personal-property boot in real-estate transactions:
- Furnishings in vacation rentals. Furniture, appliances, and decor that are part of the sale of a furnished rental property are not real estate. The portion of the sale price allocated to furnishings is personal-property boot. Allocation matters — a low value assigned to furnishings preserves more 1031 deferral.
- Equipment included with commercial properties. Forklifts, restaurant equipment, signage, fixtures that are not affixed to the building. The same allocation issue applies.
- Inventory or business assets. If a property sale includes a going-concern business component, the business assets are not real estate.
The cure for personal-property boot is allocation. Both buyer and seller benefit from minimizing the personal-property portion of the price, since the buyer also faces faster depreciation rules on personal property. Allocation tables done by an appraiser at closing tend to settle this efficiently.
How Boot Is Allocated Between Recapture and Capital Gain
The IRS uses a "recapture first" allocation rule on boot. Under IRC §1245(b)(4) and §1250(d)(4), recognized boot is treated as coming from depreciation recapture before capital gain.
This matters because the recapture rate is higher than the capital gain rate. A small amount of boot can produce a disproportionately large tax bill if it's allocated to recapture rather than capital gain.
Worked example: $100K boot received on an exchange with $80K of accumulated depreciation and $400K of total realized gain.
- First $80K of boot: depreciation recapture at 25% = $20,000 tax.
- Remaining $20K of boot: capital gain at 20% = $4,000 tax.
- Total: $24,000 federal tax on $100K of boot — an effective rate of 24%.
Compare to receiving $100K of pure capital gain from a non-exchange sale: 20% × $100K = $20,000. The boot's recapture-first allocation costs an extra $4,000 federal tax in this example, plus state tax on the higher base.
The implication: if any boot is unavoidable, taxpayers with significant accumulated depreciation should model the after-tax cost carefully. Sometimes structuring fresh cash to fully eliminate boot is worth it; sometimes accepting a small boot is more efficient than the cost of additional financing.
Simple 1031 LLC documents the cash and mortgage boot exposure in every exchange agreement and coordinates allocation discussions with the title company. We are a Qualified Intermediary and do not provide tax, legal, or investment advice — boot allocation, basis modeling, and the recapture-first analysis are CPA work.
Frequently Asked Questions
Can cash boot be offset by new financing?
No — financing is not boot for §1031 purposes. Adding new debt at the replacement closing increases your equity, not your cash boot. New financing helps with the equal-or-greater-value rule and can offset mortgage boot from a trade-down in debt, but it doesn't directly offset cash boot received. The cure for cash boot is generally to use the cash differently (pay closing costs from outside funds, route earnest money through QI properly) or accept the boot as taxable.
What's mortgage boot and how is it triggered?
Mortgage boot is the reduction in debt between your relinquished property and your replacement property. If you sell with a $400K mortgage and buy with $250K, the $150K reduction is mortgage boot — treated as cash received. The reasoning: debt relief is economically equivalent to receiving cash. Mortgage boot is the most common surprise on §1031 trade-downs and can be offset by adding fresh cash at the replacement closing equal to the debt reduction.
Is earnest money considered boot?
Properly handled, no. Earnest money on the relinquished sale should flow through the QI escrow rather than back to the taxpayer at closing. Earnest money on the replacement purchase comes from the QI's exchange funds, not the taxpayer's pocket. When earnest money is mishandled (returned to the taxpayer rather than routed through the QI), it can create constructive-receipt boot. The exchange agreement should document the earnest-money path before any deposit is made.
Can I pay closing costs with exchange funds without triggering boot?
Some closing costs yes, others no. Customary buyer/seller costs (title insurance, recording fees, transfer taxes, escrow fees, QI fees) can be paid from exchange funds without triggering boot. Costs that are arguably the taxpayer's personal expenses (legal opinions on tax matters, financing-related fees, prepayment penalties on personal debt) should be paid from outside funds. The IRS has issued specific guidance on which closing costs are clean and which create boot risk.
What's the difference between cash and mortgage boot taxation?
Both are taxed identically — recognized to the extent of realized gain, with recapture first and capital gain second. The mechanics differ in that cash boot lands in the QI escrow as actual cash, while mortgage boot is constructive (no cash actually changes hands; the reduction in debt is the boot). Both are reported on Form 8824 in the year of exchange and produce the same tax bill if amounts are equal.
Boot exposure question?
Simple 1031 LLC documents cash and mortgage boot exposure on every file. $799 flat fee for forward exchanges, $5M Fidelity Bond and $10M E&O coverage.